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Payments and liquidity under adverse selection

  • Rocheteau, Guillaume

Informational asymmetries regarding the future value of assets affect their role in exchange. I construct a random-matching economy composed of two assets: a risk-free bond and a Lucas tree whose terminal value is privately known to its holder. No restrictions are imposed on payment arrangements. The main finding supports a pecking-order theory of payments: Agents use their risk-free bonds first in order to finance their spending shocks, and they use their information-sensitive assets only if their holdings of bonds are depleted. The theory has implications for the optimal provision of risk-free bonds, the structure of asset returns, and liquidity.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 58 (2011)
Issue (Month): 3 ()
Pages: 191-205

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Handle: RePEc:eee:moneco:v:58:y:2011:i:3:p:191-205
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